Can a director be personally liable for their actions as a director?

The most common situation where a director incurs personal liability for their actions is where the director has acted in breach of their directors’ duties. In such a case the director of a company could be personally liable for any losses the company suffers, and accountable (to the company) for any profits made by the director as a result of the breach. If a director has breached their directors’ duties, they are advised to obtain legal advice from a company solicitor as soon as possible.

A second situation where personal liability is relevant is where the director was involved in a tortious act. This area of law is quite complex, and there are different rules that apply depending on the tort in question. For example, if the act of the director amounts to deceit, the director will be personally liable for the losses related to the tortious act. On the other hand if the act was a negligent misstatement, the director will only be personally liable if their actions implied that he/she was personally accountable for the statement, and the other party had relied on the director’s personal opinion. A company solicitor should be consulted for legal advice in the event of a director committing a tort.

A third scenario where such a liability arises is when a contract is made on behalf of a company prior to the company’s incorporation. In such a case contract law would not allow for the contract to exist between the company and the other party because the company had no capacity to enter into the contract. Therefore both through common law and through operation of s. 51 of the Companies Act 2006, such a contract will be between the contracting party and the director which purported to act on behalf of the company.

There are two ways in which a company can limit a director’s personal liability. The first way is commonly used after a director had breached a duty, in which case the company can ratify the director’s behaviour, and any personal liability is transferred to the company. There are several conditions attached to ratification and a commercial solicitor can provide legal advice on the validity of a resolution to do so. The second way is novation of contracts, where the company takes on the liability of an existing contract by creating a new one which includes the same terms. This is usually used for contracts which were entered into prior to incorporation.

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